It has been our office’s view that what matters most for labor supply is total household income. If you have the financial cushion to not work given *gestures at everything* then some individuals will choose not to do so. Initially federal aid kept households afloat financially during a global pandemic. One result of the federal aid was that households built up a tremendous amount of excess savings. Expectations were, and continue to be that as those savings are spent, more workers will return to the labor market as they need to pay the bills and put food on the table. I remain a labor supply optimist.
It felt like much of the economic discourse earlier this year focused almost solely on the UI benefits. While clearly those are a big piece to the puzzle, they are not the only piece as our office has noted previously. The good news is this broader look at incomes is now coming into focus a bit more. See this really good Twitter thread from the NYT’s Ben Casselman yesterday for example. While it’s good the conventional wisdom is catching up, it’s also important to note that the story continues to evolve further.
In particular, labor income is booming. Underlying wage growth is taking the lead from the expiring federal aid. However this growth is happening among a smaller pool of workers than before. They are working longer hours and at higher pay. As shown below employment in Oregon is 4% below pre-COVID peaks and 6% below trend. However labor income is 4% above peak, and nearly back to trend. Payrolls have fully recovered even if employment has not.
Why does this matter and what are the implications? Well, for starters it means household savings are not being drawn down as much as anticipated even a few months ago. This is especially the case for households where at least one adult is working. The implications are that a second adult may not have to return to the workforce as quickly as expected given the income gains from the one earner plus the savings built up during the pandemic. In fact if you look at the latest survey from Indeed it shows the main reason job seekers are not urgently looking for work has shifted in recent months from COVID fears to financial cushion to spousal employment.
It’s important to keep in mind that the overall economic outlook remains bright. Strong household finances mean consumer demand is robust. But while it is encouraging that the economic discussion has shifted to focusing on total household incomes, the actual story continues to evolve. This payroll piece is newer in the sense that in aggregate it’s really starting to move the needle. Withholdings here in Oregon remain very strong. It also means that the risks that labor supply will take a few more months to fully return have increased. Our office’s view continues to be that the labor market will improve. Workers will return given job opportunities are more-plentiful and better-paying than before the pandemic, and as savings are drawn down. Even so the labor market will remain tight for structural and cyclical reasons, it just won’t be acutely tight.
Note that nationally the data show both strong hourly wage gains and a longer workweek, while the Oregon numbers show a steady workweek but even stronger hourly wage gains. The data can be noisy and we may have to wait for future benchmarks or revisions, but either way aggregate payroll growth is very strong
Our office is working on some research related to the economic impacts of climate change and natural disasters more broadly. This is something we have done in bits and pieces over the years when it comes to wildfires, ice storms, droughts, Cascadia risks and the like. I’m also working my way through the virtual seminars on climate economics from the San Francisco Fed. I’m unsure what the end result will be. We know we need to stay on top of the research. Ultimately I’m envisioning more of an anthology of shorter summaries of the different avenues of research, rather than a giant report, but we shall see.
Today I wanted to share a quick look at something that’s missing from some of the earlier research. This is not meant to criticize anything, but rather to show how some of the dynamics are evolving and impacting our lives already. First, here is a famous map of the expected impacts of climate change from University of Washington’s Cliff Mass. This screenshot comes from a presentation I gave back in 2015. It makes a pretty compelling argument — as does other research from a decade ago — that the Pacific Northwest will be impacted to a lesser degree than the rest of the country. It even tells a relatively benign story of climate change for us locally. And while those relative dynamics likely remain true, it does not mean we are immune.
Wildfires are the one thing that jumps out to me today about the map that didn’t years ago. They’re not on the map explicitly, and to the extent we think of heat waves and water issues contributing, the idea of fires on the western side of the Cascades was not given a lot of discussion in the literature. After all, it rains a lot in the Northwest. Again, this is no criticism of Dr. Mass nor the earlier research. It’s probably more of a personal failing of not reading enough of the research at the time. Even so, what our office is trying to do is make sense of the impacts we’re experiencing now. And then to try and articulate the risks and build them into our forecasts where appropriate.
Now, to be fair, fires and smoke are a relatively new phenomenon. At least in terms of duration, or the number of days per year. Sacramento State’s CapRadio had a really interesting look at the changes in smoke over time and how it impacts the entire country. As I’m piecing together these bits of research, I thought I would share some of these impacts here in Oregon. The table below shows the number of really bad air quality days as reported by the EPA (AQI>150). These are days where you don’t want to be outside. If you include days where it’s noticeable that something is wrong, it adds a dozen or two more days to the counts. Also note that the map above was originally published in 2014. Almost all of our bad smoke years have happened since then.
You can take any of these counties and look at them individually. Below is a chart for Jackson County (Medford MSA) in part because the smoke in southern Oregon has been bad in recent years, and in part it has been bad enough that they are working on retractable roof theaters for the Shakespeare Festival and the like. If you can only go outside 11 out of the 12 months in a year, smoke mitigation makes a lot more financial and social sense than if it’s only a day or two.
Finally, what are the risks and costs to smoke and air pollution more broadly? There are economic impacts related to destroyed properties, and people not venturing outside for activities or travel. There are clear health impacts when it comes to respiratory issues leading to increased hospitalization and asthma medications and the like, some of which are discussed in the CapRadio work. However as documented here, there are also cognitive issues too related to pollution. Wildfire smoke is pollution. Studies show that chess players and baseball umpires make more mental mistakes on polluted days compared to non-polluted days, for example. Repeated exposure over time can also lead to longer term impacts as well.
Anyway, thought this was worth sharing while we continue to chip away at the broader research agenda. Stay tuned in the months ahead for more.
Right now consumer spending is strong, COVID is keeping some workers home sick, and factories and warehouses are operating at or near capacity. These factors result in struggling supply chains, bare shelves and rising prices. Firms are indicating that these issues are likely to persist well into next year. From an economic growth perspective what matters isn’t just when things normalize, but when do things stop getting worse. It is possible that we are currently at or near peak supply chain problems, but still quarters away from any return to normal.
Here in Oregon we have good and bad news. The good news is that we have less direct exposure than most states to these supply chain problems. Our manufacturers rely on imported intermediate goods less than most other states. This is largely because we rely more on local sourcing for wood products and food, and our largest valued added comes from locally grown ingots that turn into silicon wafers and the like. Additionally the movement of freight — the value of shipments relative to the size of the economy — is relatively smaller in Oregon than in many other states. That means the supply chain problems disrupt a somewhat smaller slice of the regional economy than is the case in the Midwest, for example.
Now the bad news. Even if we are directly exposed to a lesser degree, we are not immune. Supply chains that are global in nature impact everything. An old ODOT report estimates that 60% of all goods produced in Oregon will be sent out of state, while 70% of all goods consumed in Oregon will be brought into the state. Slowdowns at ports in southern California, or backups at rail yards in Chicago impact the ability of Oregon firms to get the supplies they need and for Oregonians to buy products at the store. High transport costs and supply chain problems are a macro constraint.
Where do we go from here? Broadly speaking there are a few potential avenues for improvements. First, as the pandemic improves, more workers can return to their jobs, improving production and the movement of goods within existing supply chains. Second, firms can increase their productive capacity to meet the strong demand. Not only would this boost economic growth, but a supply increase also would slow inflation. Included here would be added trucking activity to relieve the bottlenecks. The vast majority of freight moves on trucks. Third, consumer demand may cool, easing pressures. This could be due to consumers shifting their spending more into services as the pandemic wanes, or higher prices resulting in fewer goods sold, which would better align with current supply capabilities.
These bigger adjustments will take time. The silver lining today is vendor delivery times are no longer worsening economywide — they’re terrible but not getting worse in recent months — and business investment is strong. Supply chain improvements should be coming, but we’re a long way from normal.
Given these issues and requests for data, our office has pulled together a number of supply chain related charts which you can see or download below.
Air travel was always one of the last things expected to rebound. After all, why would one willingly enclose themselves in a tight space with hundreds of strangers for hours on end during a pandemic? The main reasons are traditionally because we have to for work or family reasons, or because we want to visit a far-flung destination for fun. Well, nationally air travel (passenger counts) are about 80% recovered. Leisure travel as picked up due to strong household finances and pent-up demand. Many of us postponed vacations in 2020, for example. On the other hand, business travel remains down, weighing on urban economies around the country.
You can see these relative patterns here in Oregon when looking at passenger counts from our larger airports. In keeping with the major theme that it is the lagging in-person activities weighing on urban economies, the PDX passenger counts are still down around 30%, compared with our regional airports which have nearly fully recovered this summer. Eugene, Medford, and Redmond are all roughly the same size and have all experienced nearly identical patterns over the past 18 months.
But what has really stood out to me in the past year is that the PDX passenger numbers are pretty similar to the national figures. Yes, they’re 8-10 percentage points lower, but given the broader narrative that has seeped into the conventional wisdom, Portland really isn’t lagging too terribly much. Customer surveys indicate that business travel accounts for a little bit higher share at PDX than average, likely explaining some of the US-PDX gap. With all that in mind, I went looking for a handful of other major airports for comparison purposes. You can see the results below.
These airports were admittedly chosen somewhat haphazardly but purposefully based on geography and/or size. We have Seattle (SEA) for obvious regional considerations even as it is much larger, and San Diego (SAN) for both West Coast and airport size purposes. PDX traffic mirrors these nearly identically. Then you have Denver (DIA) for western states, Salt Lake (SLC) for western and size, and finally Nashville (BNA) for size comparisons. These three are all seeing stronger passenger travel numbers. They are also more of regional hubs with connecting flights than the west coast airports shown below, which have fewer connections and more origination/destination flights. That functional difference between the types of airports likely plays a role here. Even so, Colorado, Tennessee, and Utah’s respective state economies are also stronger than the West Coast states which have had more stringent health policies in place, which is a difference seen in the employment data when it comes to leisure and hospitality and education in particular.
Bottom Line: Air travel is continuing to rebound. Households have the income and pent-up demand for leisure travel. Oregon’s regional airports are seeing larger passenger counts as a result. However big, west coast metros continue to lag the recovery in part due to working from home, in part due to the lack of business travel, and in part due to the lack of in-person activities that cities traditionally thrive on. Even so, when it comes to Portland’s relative performance, it seems to be much more a matter of degree, not kind.
This morning the BEA released 2021q2 state estimates for personal income, which included some noticeable revisions which we’ll get into. As expected, incomes are down from the first quarter when the last of the recovery rebates was disbursed. However, incomes remain strong, and above pre-pandemic expectations even excluding the direct federal aid. Here is how our office wrote up the income situation in our latest forecast.
The primary reason for the strong economic outlook are household balance sheets. Consumers today have no shortage of firepower when it comes to their ability to spend, if they want to and/or feel safe enough doing so. Current incomes are higher than before the pandemic. Much of this increased income is thanks to direct federal aid. Here in Oregon, unemployment insurance has boosted incomes by more than $11 billion while the recovery rebates added nearly $13 billion. Combined this represents about an 11 percent boost to incomes in the state in the past 18 months. Federal policy has accomplished its job of keeping households above water during the pandemic. More encouragingly, underlying income that excludes the direct federal aid has not only recovered but has nearly regained its pre-pandemic trend.
Keen-eyed observers may notice that the 2020 cycle looks a tad weaker than in previous iterations of the chart. It is. A couple months ago the BEA incorporated the latest round of revisions at the U.S. level and they were negative. Those downward adjustments are now feeding through into the local data. What’s of note here is these adjustments are almost entirely to non-wage income, just as they were to the national data. Dividends, interest, and rent have been revised down over time, while nonfarm proprietors’ income over the 2018-2021 period. The proprietors’ revisions in particular are counter to the ongoing strength seen in Oregon business-related taxes paid. Both the traditional corporate and the pass-through revenues have been stronger than anticipated, especially during the pandemic. Given the BEA eventually uses tax returns to help benchmark the data over time, our office anticipates these income estimates will be revised higher in the years ahead, but for now this is where they stand. Note the gray, All Other line in the chart. This is the usual pattern you see in the BEA data where there are slight adjustments to the past couple years of data. Nothing really to note here other than both wages and unemployment insurance have been revised up somewhat.
Finally, any time there are revisions it’s important to check out they play out locally versus elsewhere around the country. By and large, Oregon’s income revisions match the patterns nationally. The big improvements Oregon has experienced in our relative incomes in the past decade remain intact. Over the past year, Oregon’s per capita personal income is 94.7% of the U.S., the highest positions we have seen since the mid-1990s. Oregon’s average wage is a bit stronger, standing at 96.1% of the U.S. This is effectively as strong as Oregon has ever been. The absolute peak in the relative wage data was 96.5%, reached one time in 1980 — really the 1979q2-1980q1 average — and never to be seen again as the bottom was about to fall out on the timber industry. With this in mind, I’m dusting off the following passage talking about these wage trends.
Oregon’s average wage, at least in the past 50 years, has always been below the national average wage. We took a huge step back during the 1980s when the timber industry restructured. Oregon lost 12% of its jobs in the early 80s recession, whereas we “only” lost 8.5% of our jobs in the Great Recession. During the technology-led expansion in the 1990s, we regained about half of the decline in average wages and that held steady for more than a decade. However, since the Great Recession Oregon’s wages have outpaced the nation’s by a considerable margin. Oregon’s average wage today is at it’s highest relative point in more than a generation. Or put differently, Oregon’s average wage today is at it’s highest relative point since the mills closed in the 1980s. Some of this is due to the fact the recovery in Oregon has been led by high-wage jobs, even to a larger extent that nationally has been the case. But this industry or occupational mix can only explain a portion of our relative wage gains. The bulk of Oregon’s improvement here is due to stronger wage gains within industries and occupations. This is great news.
Looking forward our office expects Oregon’s underlying incomes excluding the fading federal aid to continue to growth strongly, and to hold our relative position compared with the rest of the country.
What you need to know: The allowable rent increase for the 2022 calendar year is 9.9%.
See our office’s Rent Stabilization page for more, including a downloadable spreadsheet with all the data.
I know some of you may be scratching your heads given inflation is currently running hot and the recent deep dive into the outlook for inflation. The reason why next year’s maximum allowable rent increase is relatively tame comes down to fact the law uses as 12 month moving average. Specifically see ORS 90.323 (2) where it reads, in part, “the annual 12-month average change in the Consumer Price Index for All Urban Consumers, West Region (All Items).” Currently the economy is experiencing a rapid increase in inflation, but it takes some time for that to feed into a 12 month average. The current calculation includes some weak months along with the strong inflation readings in the past handful of months. Combined, they result in inflation of 2.9%, making the maximum allowable rent increase in 2022 9.9%.
As such, this also means that the current bout of inflation will mostly be reflected in the 2023 maximum allowable rent increase which our office will announce a year from now. This will be the case even if underlying inflation slows further in the months ahead. This is simply due to the difference between noisy monthly data and a more stable 12 month average. As a stylized example, you can see this difference in the chart below. The hypothetical scenario here has inflation slowing to a 2% annual pace (the Fed’s target) starting next month. You can see that a year from now the single month inflation readings would be back down, but the trailing 12 month average will still be elevated. This means 2023’s maximum allowable rent increase will higher than this year’s.
This morning the Bureau of Labor Statistics released the August CPI data. As expected it showed both a slowing in inflation, but still at a rate above the Federal Reserve’s target. Inflation over the coming 3, 6, 12 months is one of the most interesting economic developments to watch. This is something an increasing number of you have reached out to our office about. In our latest few forecast documents we have had a couple pages on the inflation outlook. Today I am pulling out and updating our most recent thoughts on the subject.
In recent months inflation is running hot. Much of this can be explicitly tied to reopening sectors of the economy, or shortages in the automobile industry. However, even stripping away these likely temporary issues, the risk remains that underlying inflationary pressures will remain somewhat above the Federal Reserve’s target moving forward.
On the one hand, prices in recent months have surged in sectors and activities previously restricted by the pandemic. The costs for airfares, hotels, and admissions to events are up. However these prices also dropped earlier in the pandemic. The current surge is really bringing these prices in line with where they likely would have been absent the pandemic. As such, these prices will moderate moving forward. [This morning’s report showed an unexpected decline in these prices, likely due to the delta wave, even if these broader dynamics were anticipated.]
Additionally, demand for automobiles has recovered much quicker than production has, largely due to the shortage of semiconductors needed to complete assemblies. This mismatch between supply and demand is driving the price of both new and used cars considerably higher. As computer chip production increases, and as demand slows in the face of these higher prices, the overall dynamics in the auto industry should moderate as well.
While these examples may explain a large part of the current high readings for inflation, they are not particularly interesting or pertinent to the overall monetary policy discussion. The Federal Reserve will look through temporary bouts of inflation. What the Fed ultimately cares about is persistent inflation that is higher than its 2% target on an ongoing basis. For this reason note the gray bars in the chart above. The All Other portion of the inflation readings are currently running at about a 4% annualized pace. This is well above target. How long does this last? At what point would the Federal Reserve respond to readings continuing in this range?
The key dynamics to watch here are the interactions between actual inflation, expectations about future inflation, and underlying wage and income growth. Of course all three of these are point up today, but what does the intersection between them look like in 3, 6, 9 months from today? Without the belief that prices moving forward will be higher, it is harder for firms to raise prices. Similarly for income gains, if consumers cannot afford the higher prices without sacrificing quantities consumed, then prices will slow accordingly. Such inflationary pressures will peter out on their own.
The ultimate economic risk lies in inflation proving more persistent than believed such that the Federal Reserve steps in and raises interest rates to cool the economy. Not only would this slow economic growth, but in some historical periods, it has even caused a recession. The Fed has not yet laid down hard markers on what it will or will not tolerate when it comes to inflation, nor its beliefs on just how much is transitory versus persistent. However the answers to these questions in the quarters ahead will matter considerably. To be clear, no reasonable outlook calls for hyperinflation or even mid to high single digit inflation. However, the underlying stage is set for inflation that could be modestly, yet persistently above target. Whether the economy actually experiences that or not is unknown.
Today the Federal Reserve is nearing agreement on the timing and pace of tapering, or reducing its long-term asset purchases. Many market participants expect the announcement in the next month or so with the actual tapering to begin late this year or early next. In terms of interest rates, market participants expect the first rate hike to occur in late 2022 or early 2023. The risks on the timing are balanced. A few more hot inflation prints and rate hikes may occur sooner, a few weaker monthly jobs reports and slowing inflation, and rate hikes may be pushed to later dates.
Now, one potential saving grace for inflation could be productivity growth. Not only does increased productivity raise the overall speed limit of the economy, but it also helps firms absorb higher costs without pushing them all forward onto consumers. If a business is able to produce more output with fewer workers, it makes the cost pressures on their inputs (parts and labor) more manageable. As a result, inflation in the overall economy can better be kept in check.
To date, productivity has increased during the pandemic. Output per worker in Oregon is up around 8 percent. Much of these gains have been forced onto firms where they must try and make do with what they have. Consumer demand is strong, and the firms have limited staff and production capabilities. They are doing more with less because they really have no other choice.
However, over the medium- and long-run firms can better plan for their investments which tend to raise productivity as well. Nationally, new orders for capital goods and announcements of capital expenditures are up indicating businesses are looking to invest in new plants, equipment, and software moving forward. This should make managing price pressures easier in the years ahead.
Two final notes on productivity and inflation.
First, new business formation is strong since the start of the pandemic. New firms tend to bring new products and services to the economy, and improve efficiencies and raise overall productivity. Should this new generation of businesses do likewise, productivity should continue to improve.
Second, increased production capacity should also relieve price pressures. If products are no longer supply-constrained, increased demand should result in more production and not just higher prices. As detailed in our office’s previous forecast, a number of manufacturing subsectors – food, machinery, and wood products in particular – were already at their historical limits in terms of capacity utilization. They need to expand in order to meet demand. However a similar argument applies to services like child care. A national boost to increase the supply of these, be they semiconductors, housing, or child care, as is currently being debated in Washington D.C. as part of the infrastructure and/or reconciliation bills, could ultimately prove disinflationary as it would remove current choke points in the overall economy.
Oregon’s long-run economic and revenue outlook is closely tied to the state’s population forecast. The more Oregonians, particularly working-age Oregonians, the more income earned and taxes paid. Plus a larger population increases demand for new housing construction, additional pizza parlors, and the like which generates even more economic activity. However, the state does not necessarily have to experience faster population growth to see stronger economic and revenue gains. The main reason is there are already plenty of Oregonians today who are underutilized. Businesses have a wealth of potential employees, if they are able to or willing to hire from disadvantaged populations that have traditionally been excluded from the economy to a greater degree. In our office’s previous forecast we discussed how there are historical inequities built into what economists generally define as full employment (see PDF pg 18 here).
A new report titled “Reimagining Full Employment” from the Roosevelt Institute examines what the economy could look like if some of these historical inequities were addressed in the United States. Building off the major themes of the Roosevelt Institute’s work, our office developed a few Oregon-specific scenarios. What follows is a high level summary of that work.
Specifically, what would Oregon’s long-run labor supply look like if we closed the educational attainment gap between white, non-Hispanic Oregonians and communities of color? How many more workers could local businesses hire if employment rates across all segments of the population were at their historical maximum? What if women were hired at the same rate as men? All three of these potential scenarios address a specific labor market inequity, and in doing so would boost the overall potential of Oregon’s economy, including sales for local businesses and the associated taxes paid to fund public services.
Note: These scenarios and analysis is built off of potential changes seen across different cohorts of Oregonians over the next decade. Specifically these cohorts are grouped by sex (male and female), educational attainment (college graduates and non-college graduates), race or ethnicity (white, non-Hispanic, and Black, Indigenous, and People of Color), and eight different age groups (16-24, 25-34, 35-44, 45-54, 55-64, 65-74, 75-84, 85+). There are 64 cohorts in total. The scenarios also account for the increasing diversity among Oregonians, a trend expected to continue in the years ahead.
The upshot of addressing these employment disparities is Oregon, is that they have the potential to boost the labor supply much more than any realistic increase in migration ever could. By hiring to a greater degree from Oregon’s existing residents, firms would be able to tap into a much larger pool of labor in order to expand and grow. Such an outcome would be a win-win for society and the economy.
The table below summarizes the findings of these three potential scenarios. The first set of numbers indicate how much larger labor supply would be, above and beyond our office’s baseline outlook, if a particular disparity is addressed. The final number converts this into a population growth rate equivalent. Over the decade ahead, our office expects Oregon’s population to increase by 0.8 percent per year. Every increase of a tenth of a percent is a massive change in the number of potential workers in the regional economy.
The single largest inequity is the gender gap. Women are employed at lower rates than men, and earn lower wages as well. Increasing employment opportunities for half the population (women) really moves the overall economic needle. This is easier said than done, of course. In particular the largest gender gap in terms of employment is seen between moms and dads. To really address this disparity, the availability and affordability of childcare and extended care after school would really need to be addressed. The unemployment rate between women and men is not noticeably different, but that’s largely due to many moms indicating they are not looking for work specifically because they are taking care of the home or family. Flexible schedules, working from home, and broader societal changes are also likely needed to help address the gender employment gap. Ultimately if women in Oregon were employed at the same rate as their male counterparts across each cohort, Oregon’s labor supply would be more than 150,000 larger than forecasted in the decade ahead. This boost would be equivalent to seeing population growth per year of 1.3 percent instead of the baseline of 0.8 percent. In other words, migration into Oregon in the decade ahead would need to be 60 percent above our office’s forecast to generate an equal boost to the labor supply as would raising female employment rates among existing Oregonians.
The scenario with the second largest boost to Oregon’s labor supply really boils down to employing individuals at the highest rates experienced in recent decades when examining each cohort based on age, sex and educational attainment. For example, if all women of the same age and educational attainment were hired at similar rates, how much larger would Oregon’s labor supply be? These are not either/or scenarios. They simply show how large the latent labor force is even within similar groups of workers. All told, this scenario would boost Oregon’s labor force by more than 80,000 workers in the decade ahead. This is equivalent to seeing population growth per year of 1.1 percent instead of the baseline of 0.8 percent. Put another way, migration into Oregon in the decade ahead would need to be 33 percent above our office’s forecast to generate an equal boost to the labor supply.
The third scenario modeled here eliminates the educational attainment gap between white, non-Hispanic Oregonians and their Black, Indigenous, and People of Color peers. This scenario only closes the college graduate gap among the youngest age cohorts and not for the entire population. From a policy perspective it would be more likely to target higher college enrollments among recent high school graduates than it would be to send middle-age and older Oregonians back to college campuses.
Note that while raising educational attainment and closing the gap does boost Oregon’s potential labor force by the equivalent of about one-tenth of a percentage point of population growth a year — a noticeably boost — such changes are relatively small compared to the other two scenarios. The reason is twofold. First, the educational attainment gap is only closed for the youngest cohorts, leaving most of the labor force unchanged.
Second, the largest differences related to educational attainment are not employment-related, but income-related. Yes, employment rates are a bit higher for college graduates, but wages are considerably higher. The median wage for both white, and BIPOC college graduates in Oregon is about 80% higher than it is for non-college graduates of the same race or ethnicity. Therefore the biggest economic and societal boosts to raising educational attainment and addressing racial disparities will not be seen in the raw number of workers in Oregon. Rather, the bigger boosts will be seen in the income, poverty, homeowner, and taxes paid data.
Bottom Line: Addressing economic disparities raises the potential of the entire economy. Local businesses have a larger pool of workers to choose from than many believe due to the historical underutilization of many segments of the population. Faster migration in the years ahead will grow the economy, however even if stronger migration gains do not materialize, there remains considerable upside risk to Oregon’s economic and revenue growth.
Coming out of the Great Recession it was the nation’s largest urban areas that turned around first. Being home to the most diversified economies also meant less exposure to housing and government, the two biggest drags last cycle. In part due to the more-plentiful job opportunities, and in part due to increased preferences for urban living, strong population gains to the larger metropolitan areas reinforced these economic dynamics, driving a stronger recovery in urban areas than in many smaller metros and rural communities.
This cycle is different. Oregon’s large urban areas are lagging the rest of the state. This is due to a number of factors including less business travel, more working from home, and all those great urban amenities being transformed into disamenities when they cannot be used or enjoyed during a pandemic. All of these are key factors impacting urban areas nationwide before one gets into any discussion of the impacts from local protests and clashes of violence. Our office’s view is that those impacts are negative, likely contributing to a larger local decline versus other coastal, and/or northern metro areas (the south instituted fewer public health restrictions). While we need better, and more granular data to do a proper comparison, the clashes of violence are likely to be more of a secondary impact, relative to the more primary impacts of working from home and lack of business travel.
Over the medium- and long-run, the Portland economy is expected to regain its position near the top of the pack. Economic growth is fundamentally about how many workers a region has and how productive each worker is. Population growth will strengthen during the recovery, bringing with it an influx of new workers and new firms that will outpace much of the state and nation. Human capital accumulation and agglomeration effects will boost urban economies to a greater degree. Plus urban areas tend to have larger pools of financial and physical capital to help drive productivity gains in the years ahead. The wildcard in terms of downtown Portland and job centers more broadly remains working from home. Ultimately where that lands, be it a couple days a week versus fully remote, will go a long way to determining the impact on commercial real estate.
However, with the pandemic still raging, the Portland regional economy is still suffering more than the rest of the state. In particular it is the in-person activities that cities usually thrive on that are seeing slower gains than elsewhere around the state. It is somewhat of an open question just how much of these differing trends can be chalked up strictly to the pandemic itself, versus how consumers behave differently across the state in response to the pandemic. Nonetheless, Portland’s in-person recovery is lagging the rest of the state.
UPDATE 9/22/2021: Charts updated with latest available data.
In the Portland region, the number of seated diners at restaurants is only halfway back to where it was before the pandemic, compared with a full recovery in other parts of the state, at least among restaurants using the OpenTable reservation software. Note that in recent weeks, the weakening in indoor dining is not seen in the Portland region but elsewhere in the state where cases and hospitalizations are much higher during the delta wave, and vaccination rates are likewise lower.
One bright spot for tracking the recovery in downtown Portland is that video lottery sales in the urban core have fully recovered, and set records this summer. While an imperfect measure, it does indicate that foot traffic and consumer spending are returning. However, in keeping with the broader patterns in the economy, these gains in video lottery sales are larger in the Portland suburbs, and strongest elsewhere across the state.
Lastly, the relative economic performance is seen in the employment data as well. Leisure and hospitality employment in Multnomah County remains down three times as much as in the Portland suburban counties, and ten times as much as in the rest of the state, with data available through July.
Two major contributing factors remain the lack of business travel during the pandemic, and the increased number of people working from home. Both issues work to lower the number of consumers in the urban core, while simultaneously boosting their home markets, be they out of state or in the suburbs. In some hot off the press new NBER research by Althoff et al (2021), they write when it comes to working from home that “[t]he larger a neighborhood’s initial share of high-skill service workers among its residents, the larger its decline in visits to local consumer service establishments and the sharper the drop in residents’ spending on consumer services.” The authors go on to conclude “[i]f the recent pandemic is any guide, high-skill service workers will benefit from increased spatial flexibility and make use of it, while low-skill service workers will suffer from their dependence on local demand in a more footloose world.” This pattern is borne out nationwide, and here in Oregon as shown above.
Again, over the entire cycle our office is bullish on the future of large, urban economies. And to the extent there are some structural changes nationally, Portland and Oregon more broadly are likely to benefit overall. Pre-pandemic, every region of the state was average or above average in working from home. However, the pandemic is still raging, and many in-person activities, while growing again, are still significantly below pre-COVID levels.
This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary and a copy of our presentation slides.
The economic outlook remains bright. Strong household incomes, boosted considerably by federal aid during the pandemic, are the underlying driver. Consumers have no shortage of firepower if they want to and feel safe enough to spend. The key to the outlook remains translating this firepower into actual consumer spending, particularly in the hard-hit service industries. Firms today are trying to staff up as quickly as possible to meet this increasing demand. The actual number of jobs created this year will be the largest on record in Oregon. The state’s labor market is now expected to regain all of its lost jobs by next summer, or one quarter sooner than in the previous forecast.
While these dynamics remain intact, the risks are weighted toward the downside. Growth in a supply-constrained economy is challenging. Firms are struggling with supply chains and a tight labor market. Wages are rising quickly to attract and retain workers. Prices are increasing as demand continues to outstrip supply. On top of this the current delta wave of the pandemic complicates the immediate term outlook. What matters most economically are shutdowns. A modest pullback in consumer spending in a few categories will not lead to mass layoffs. If anything, any slowing in spending today will likely turn into stronger gains in coming quarters.
This cycle is different. The current recovery will be faster, more complete, and more inclusive than recent experiences coming out of the tech and housing bubbles. As some of the pandemic-specific challenges fade, the underlying economy is on solid footing due to the strength of corporate and household balance sheets.
In September of odd-numbered years, the revenue forecast closes out the biennium than ended on June 30th. At this time, the Close of Session forecast is calculated by folding any tax law changes made during the legislative session into the May 2021 outlook. This sets the bar for Oregon’s balanced budget requirement and its unique kicker law. Changes to tax law were relatively small in the 2021 session, with a net revenue impact of -$3.6 million to General Fund resources in the 2021-23 budget period.
The September forecast also reveals where revenues landed in the prior budget period. In a typical year, there are few surprises, since tax collections are relatively small during the early summer. This year was different. Due to a delayed tax filing deadline, much uncertainty remained following the May forecast. When the forecast was developed, the peak tax season had just begun.
By the end of the fiscal year, the 2021 tax season turned out to be a very big one. Collections of personal income taxes, corporate income taxes, lottery sales and the new Corporate Activity Tax all surged. Recent withholdings of personal income taxes are up 17% relative to last year. Payments during the tax season were strong as well, led by collections from high-income taxpayers. A $1.9 billion personal income tax kicker credit is slated for tax year 2021. The median taxpayer can expect to receive a credit of $420, while the average is estimated to be $850.
The strong revenue growth seen during the 2019-21 biennium put a cap on a decade of unprecedented expansion in Oregon’s General Fund revenues. Over the past decade, General Fund revenues have almost doubled from around $12 billion per year to around $24 billion. Over the decade as a whole, kicker payments amounted to $2.6 billion, reducing cumulative General Fund resources by 2.6%. Last biennium, kicker payments took away half of the General Fund growth. Looking forward, the current $1.9 billion kicker will reduce 2021-23 revenues as well.
See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.
